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Thursday, November 4, 1999 Published at 13:00 GMT

Business: The Economy

Interest rise worries business

The Bank of England's Monetary Policy Committee has increased UK interest rates by 0.25% to 5.5%.

BBC News' Ed Crooks: Rise criticised by unions and businesses
The increase, which was decided at its monthly meeting, had been widely predicted as there have been signs that the economy is continuing to strengthen since it last raised rates at its September meeting.

The MPC, which has now changed rates 14 times in 30 monthly meetings since it was set up in 1997, made no statement about the reasons for its decision.

UK economist Mark Miller from Morgan Stanley
Last month, it voted to keep rates on hold, but warned that it was waiting for more economic evidence to emerge.

In the last few weeks, government figures have shown a strong economic recovery in the three months to September, with an annualised growth rate of 3.6%.

Also, house prices surged in October by 2.8%, their fastest rate since the l980s, according to the Halifax.

Banks and building societies may well follow the lead and increase mortgage interest rates. An extra 0.25% would mean an extra £9 a month on an average mortgage.

Decision 'disappointing'

The Institute of Directors said the move was understandable, if unwelcome for many businesses.

The CBI's chief economic advisor, Kate Barker
Other business organisations agreed. Dr Ian Peters, deputy director general of the British Chambers of Commerce, said: "The Bank's decision is understandable given the warning signs on inflation, but business will be disappointed."

Unions criticised the rise which they said would put thousands of manufacturing jobs at risk. TUC general secretary John Monks said: "This is an unnecessary rise which will keep the pound at an uncompetitive level.

"Britain is not on the verge of an inflationary boom. We need a period of interest rate stability to give manufacturing a chance to recover."

Martin Temple, director general of the Engineering Employers' Federation, said interest rates were too blunt a tool to manage the whole economy.

Markets reacted calmly to the rate decision. The FTSE 100 extended early gains to stand 63 points higher at 6,344 a little while after announcement.

The pound was little moved against the dollar or euro.

Hawks abroad

Interest rates are not just rising in the UK. Within an hour of the Bank of England's announcement, the European Central Bank - which sets the interest rates for the 11 countries of the euro-zone - raised its interest rates by 0.5% to 3%.

It had been a move well-signalled by the Bank's officials, who are concerned about inflationary pressures as the economic recovery in Europe gathers pace.

The US central bank, the Federal Reserve, is also expected to raise interest rates in the next few months.

Controversy over independent role

The meeting of the MPC had nearly been overshadowed by a growing controversy over the role of its four independent members.

The four who are not bank employees - including Professor Charles Goodhart, DeAnne Julius, Willem Buiter, and Sushil Wadhwani - have complained that they are not able to receive independent advice from the Bank's economists.

But the Bank's deputy governor, Mervyn King, insists that they should not have the right to directly instruct the Bank's staff.

The controversy is linked to differing policy positions, with many of the independent members more willing to "give growth a chance" before raising interest rates again.

They argue that, with the economy still recovering from output lost during the last slowdown, there is no inflationary danger.

And they suggest that the economic models developed in the l970s and l980s may understate the degree to which the economy has modernised and is now less vulnerable to inflationary pressures.

The dispute threatens to undermine the credibility of the MPC itself as an objective policy-setting body, a key reason it was established in the first place.

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